How to divest fossil fuels, for the 99 percent

November 13, 2015

I’m all for the fossil-fuel divestment movement, at least as a way to start a conversation about climate change and build a movement. I’m undecided about whether it makes sense as an investment strategy, at least for individuals. With that caveat, let me point you to a story that I reported for the Guardian on fossil fuel-free investment options for people who don’t have access to sophisticated tools or high-priced portfolio advisors. Here’s how the story begins:

The Rockefeller Brothers Fund, the University of California and the World Council of Churches are among about 460 faith-based groups, pension funds, colleges and nonprofits that have pledged to divest some or all of their fossil fuel holdings.

They can do so with the help of consultants who will advise them on how to minimize their financial risk. High net worth individuals, with assets of $1m or more, can access such sustainable investment managers as Generation Investment Management, the London-based firm led by Al Gore, which has done very well for its investors, according to this deep look in The Atlantic.

But what about people who lack this same kind of wealth and want to divest? Few have the knowledge, time or assets to construct their own diversified portfolios. So-called green mutual funds may not be an answer, either, because many own shares in fossil fuel companies, particularly natural gas.

Why might you want to divest fossil fuels? Well, over the long term, it’s certainly possible that shares of coal, oil and natural gas companies will underperform the rest of the market. So divestment could drive superior returns.

Then there’s the moral argument for divestment, As activist Bill McKibben puts it: “If it’s wrong to wreck the climate, then it’s wrong to profit from that wreckage.”

Both arguments, I think, have merit.

That said, I’m not going to invest my own money in these ETFs or mutual funds for a couple of reasons. First, they have higher expenses that plain vanilla index funds. Those expenses eat away at returns. Academic research, meantime, has shown that index funds outperform all but the most skillful active managers over time–and picking out the best active stock pickers in advance is all but impossible for the amateur investor.

Second, these ETFs and funds screen out companies and entire industries in ways that don’t make a lot of sense to me. The ECLI ETF screens out McDonald’s because of its reliance on beef and its labor practices–even though the chain outperforms its peers when it comes to climate intensity. Monsanto also gets nixed over GMOs, which strikes me as, well, nutty, because crops that are modified to survive drought or flooding are potentially an important climate solution.Nuclear power, which provides more low-carbon energy that solar or wind in the US and globally, is also screened out; it’s hard for me to see a way out of the climate crisis that doesn’t require lots more nuclear energy, but I could well be wrong about that, if the costs of solar power continue to drop.

All that said, I’m glad these fossil-free investing choices are out there. You can read the rest of my story here and if you are serious about investing, please follow the links and dig deeper.